Contents
Preface xvii
INTRODUCTION
1
Origins of Cost Management Systems 2
The Scientific Management Movement 3
Management Control for Diversified Organizations 6
From Cost Management to Cost Accounting 7
Recent Developments in Manufacturing and Service Companies
Contemporary Management Accounting Developments 9
Summary 10
1
UNDERSTANDING COST BEHAVIOR
I2
The Role of Management Accounting 12
Understanding Cost Behavior 13
An Example of Cost Structure 14
Deriving tile Total Cost F~rnction 16
Determi~iingthe Cost per Unit of Senlice Prol-ided 17
Handling Indirect (Common) Costs 22
Computing the Cost of Unused Capacity 23
Cost-Volume-Profit Analysis 24
Summary 27 Problems 28
8
vi
Contents
2
SHORT-TERM BUDGETING. RESOURCE ALLOCATIONS. AND
CAPACITY COST 33
The Example 33
Short-Term Planning and Budgeting 34
Activities, Resource Use, and Costs 35
Optimizing the Use of Short-Term Resources 35
Equal Sales Objective 35
Total Sales Objective 36
Short-Run Profit Objec.til,e 37
Opportunity Costs, Capacity Costs, and the Theory of Constraints 37
The Issue of Multiple Resources 38
Effects of Reengineering and Contin~roirsImpro~~ement
on
Profitability 40
The Role of Cost Information in Allocating Short-Term Resources 40
Budgeting Operations 43
Production and Resorrrce Use 43
Cash Flo~ls 43
Summary 46 Problems 47 Cases: Clioosing a Product Mi\- 55
California Proclrrcts Co~poi.atiori:Analyze Proclrrct P~.ofitabiliry~-itll
Maelline Constr.aints mld Committed arzd Fle.vible Costs 56
3
ASSIGNING RESOURCE COSTS TO PRODUCTION COST
CENTERS 60
Why Assign Service Department Costs? 6 1
Measuring Costs of Using Service Departments 63
Avoid Estimates and Allocations for Cost Control 64
A Fundamental Cost Accounting Equation 65
Assigning Service Department Costs 66
Service Departments Not Directly Supporting Production Output 72
Primary and Secondary Activities 72
The Nature and Problems of Reciprocal Services 73
Fall River Company: A Nrrmer-ical E.\-ample 74
The Economic Insigl~tsof the Recip~.ocalMerlrod 76
The Treatment of Committed Costs 77
Make-or-Buy Decisions and Cost Assignmetits 77
Special Case for Arbitrary Allocations 78
Summary 79 Appendix 3.1 : The Reciprocal Cost Procedure 80
Problems 82 Case: Seligranr, Inc.: Electt.onic Testing Operations 90
Contents
4
ACTIVITY-BASED COST SYSTEMS
97
Assigning Service Department Costs to Activities 98
Identifiing Activities and Mapping Resource Costs to Actilvities 101
Estimates or Allocations? 102
Assigning Service Department Costs: Some Fixed and Some Variable 103
Activity Cost Drivers 104
Selecting Actilih Cost Drillers 108
Designing the Optimal System 110
Summary 112 Cases: The Classic Pen Company 113 Western Dialysis
Clinic 116 Paisley Instrrance Company: Acti~ic-BasedCosting in a
Senice lnd~istry 119 Bedford Mining 123 The Rossford Plant 125
The Portables Group 131 John Deere Component Works ( A ) 135
5
ACTIVITY-BASED MANAGEMENT
149
The Product Profitability Whale Curve 150
Pricing 150
Demand Curve Estimation 152
Short-Term Pricing 153
ABC Costing For a N e ~ Order
l
154
Determining Profit Margins 156
Using ABC for Analyzing Customer Profitability 158
Product Substitution 160
Redesign Products 161
Improve Processes and Operations Strategy 161
Technology Investment 163
Eliminate Products 163
Summary 163 Problems 164 Cases: Price Leadership in an
Oligopoly 168 Siemens Electric Motor- Works ( A ) 174 Kanthal ( A )
179 Indianapolis: Activity-Based Costing of City Sen!ices ( A ) 187 The
Co-operative Bank 197 John Deere Component Works (B) 213
6
COST BASED DECISION MAKING
Target Costing 223
Customer Orientation 224
The Target Costing Process 225
Target Costing in Action: Toyota Motors
222
227
vii
viii Contents
Tecrr-Do1r3nAtia!\..sis 227
Qlrolity Flrnction Deploynietit 228
Vcrllie E11git7eer~'r1g228
Reengineering 229
Kaizen Costing 229
Target Costing: A Comprehensive Example 230
Vulrre Etigirleei.it1g 233
Fltnc~tionalAnn!\!si.s 234
Reengineet.ing 235
Life Cycle Costing 236
Other Costing Tools 237
Q~ralityCost 237
Taguchi Cosr 237
Environmental. Salvage, and Disposal Costs 238
Conclusion 238 Problems 241 Cases: Pietlnlont E.~pr.essFo1711.s:
Pt.ocess Ancrlysis,fot. Stt.crte,yic Decisiot~Mukin,? 246 Acti~ifi-based
Monagenieiit crt Str~ean~Inter.riutiorial254 MosCo. Inc. 268
7
DECENTRALIZATION
288
Why Decentralize 290
Tlle Et11~it.onmento f the Fir.171 290
Ir!fot.n7ation Specicr1i:ntion 290
Tir~~elit~ess
of Respotlse 291
Conset-\,ation qf Central Moti(1geniet1rTitm 29-7
Con7l>lrtutionalCon~ple.~ity292
Tt.uinitlg for Loccrl Mcrr~crget-s 293
Moti~ution,for Loccrl Mcrrlogers 293
S~rn7nwt? 293
Organization of Decentralized Units 293
Stcrnclorcl Cost Ce11tet.s 294
Re\-et11reCenters 295
Disct~etionut;~
E.vpeiise Centel-s -795
Profit Cente1.s 297
Iti\-estrnet~tCer1ter.s 297
Developing a Performance Measure for Decentralized Operating Units 398
Problen~.~
qf Goi11Cor1gt.lter1c.c 300
Pt.ohlenis of E.vtet.r~nlities 301
O ~ ~ e r . c o n s ~ r t ~oyf~Pet.qlrisite.7
tio~~
302
Summary 303 Problems 304 Cases: Pit~nocleM~rtlialLife Insur-once
Conil>irnp 306 Wurtic~Fro:etl Foor/.s. Ltcl.: A Nerr, Z C ~ I / NCOSP
I I ( / Strrc/y in
Contents
Marlagenrent Accorrnting orrcl Estr.enre Decetrtr~crli~atio~z
3-31 Irrdlrst~.ial
Chenriccrls corn purr^ 337 BP An1er.ica: Cost Centers crricl Profit Centers
3417 Enrpi~'eGlass Con1putr.v 346
8
THE BALANCED SCORECARD: MEASURING TOTAL B u s l N E s s
UNIT PERFORMANCE 367
The Balanced Scorecard 368
Fir~ar~cial
Pei.specti\~e 368
Custort~e~.
Pel-specti~le 368
Inter.na1 Busirress P~.ocessPer.spec.ri~.e 371
Lear.nitig & GI.OM'~/I
Perspecti~~e374
Sirmniur? of Balatlcecl Sco~.ec.a/.dPet.specti\%e 375
Linking Multiple Scorecard Measures to a Single Strategy 376
Caltse a t ~ dEffect Relatiorrships 376
Perfirniatrce Dri\*et.s 377
Diagnostic Versus Strategic Measures 377
Four Perspectives: Are They Sufficient? 378
Summary 379 Cases: Chadrc*ick.Inc.: Tlre Balnnced~cor-ecor.(Scorecar
l/
380
Chenrical Barrk: Iniplemeriti~lgthe Balanc.ed Scor.ecard 383 U~liteclWtr!
of Sorrtlreaste~.riNeb\. Etr~lrrid(UWSENE) 397 Mobil USM&R ( A l )
409 Mobil USM&R (A?) 417 Mohil USM&R (B):N ~ M
Et~glarrcl
*
Sales
and Distrihlrtiori 4217 Mohil USM&R (CI: Llrhr.icor1ts B~rsirressUtiit
428 Mohil USM&R ( D ) : Gasoline Mar.keting 435
9
FINANCIAL MEASURES OF PERFORMANCE
442
The Nature of F~nancialControl 442
Control in the Aggregate Using Financial Measures 442
Control in the Small Using Nonfinancial Measures 443
Operations Control and Management By Exception Using Variance
Analysis 443
An E.va-onrple:.lei-sey Rilvr Book Prrhlrsllitlg Conlpatl~ 444
Tlie Role of \far.iur~ceAnalysis 445
Tlre PIu~rtringVaritrrrce 445
Tlie FIe.vible Brrclget CIcri.ianc.e 445
Fle.vible B~lclget\'at-iances.for. Ullit-Related Costs-Price crrrcl
Q l m n t i ~Effects 447
Flexible Bltclget Vcrrianc.esf i r . Batch-Relcrtecl Costs-Butc11 S I X ellid
Batch Cost Effec,rs 44s
Flexible Bzrc(qet 1br.icrrrc.es for P~.od~tct-Rrlntc~l
Cost.\ 448
Ftrc~ilir?.-S~~stcriIlrttrg
Costs 448
ix
X Contents
Szrmmary 449
Organization Control Using Profit Measures 449
Using PI-ofrtsto Assess 01;eani:ation Unit Performance 449
Choosiri~a Pr.ojit Index 450
Short Ruri Operating Margin 450
Controllable Conrriblrtion 451
Di\,isional Segment Margin 451
Dh-isional Pr.ojit Before Taxes 452
Conirnon Relvenlres 452
T~.ansferPricing 453
Market Prices 454
Using Ma~;qinalCost Tiatisfer-Prices 456
Using Acti\>ity-BosedCosts for Transfer.Pricing 457
Flrll Costs 458
Dlral-Rate Transfer Prices 460
Negotiated Market-Based Price 460
Tratisfe~.
Priciti-A
Szlmnzary of Practice 461
Donlestic Verszrs lr~ternationalTl.ansfer Pricing 463
Other Measures of Performance 464
Productivity Measures 465
Return on Investment 466
Material Yield 466
Labor- Yield 466
Eqzripnlent Yield 467
Summary 467 Problems 469 Cases: Transfer Pricing in an
Arrtoniohile D e a l e r s h i ~ h l m ~ aAirtomobiles,
n
Inc. 479 TransferPricing Anlong Related Businesses-KiApatrick Associates, Incorporated
484 Transfer Pricing in a Mrrltinatiorlal Corpot-ation-Del Norte Paper
Conipany ( A ) 486 Managing Projit Center Pe$ormance-Wilkinson
Tra11spot.t( B ) 490 Internal T~.ansfer-Pricing With an Oritside MarketTlie Nelzl B I . I I ~ S Conipany
M ~ ~ C ~ 496
10
FINANCIAL MEASURES OF PERFORMANCE: RETURN
ON INVESTMENT (ROI) AND ECONOMIC VALUE ADDED
(EVA@) 499
Relating Profits to Assets Employed 499
A Historical Perspective 500
The Matsushita Internal Capital System 502
The Danger of ROI Control 504
A Simple Esample 504
Contents
Technical Shortcomings of the ROI Measure 505
Economic Value Added (Residual Income) 506
Expense Versus Capitalize 509
Leased Assets 51 1
Price-Level Adjustments 5 14
Depreciation Method 5 18
Summary of Technical Adjustments to ROI and EVA Calculations 520
Linking ABC to Economic Value Added: Assigning Assets 520
Summary 523 Problems 524 Cases: Using EVA and MVA at
Outsorirce,Inc. 532 Purity Steel Corporation, 1995 537 Weste1.11
Chemical Co~poration:Divisional Performance Meas~o-ement 544
11
MEASURING CUSTOMER, INTERNAL BUSINESS PROCESS, AND
EMPLOYEE PERFORMANCE 55 1
Customer Perspective 55 1
Market and Accolrnt Sllar-e 551
Customer Retention 552
Customer Acq~tisition 5513
Customer Satisfaction 553
Customer Profitabili~ 553
Beyond the Core: Meeting Customer's E.vpectations 553
Internal Business Perspective: Operations and Innovation Processes 557
Operational E.~cellence:Time, Q~rality,and Cost
Measurements 558
Inno~vationMeasures 564
Employee Capabilities 567
Core Employee Measurement Group 567
Strategic Job Coverage 568
Summary 569 Problems 570 Cases: Draper Itist~.uments 578
Texas Instruments: Materials and Control Group 582
12
INVESTING TO DEVELOP FUTURE CAPABILITIES
TECHNOLOGY 593
Is a New Theory Needed? 594
Short Time Horizon 595
Excessi~~ely
High Discount Rates 595
Risk Adjristments 597
Alternati~lesto New Investment 598
xi
xii contents
It~crementali3erslrsGlobal Analysis 600
Front-End Itt\~estrnet~tCosts 600
Beriejits Invisible Using Traditior~alCost Systems 602
Measuring All The Benefits from the New Process 603
Redrrcecl Iti\~entot-).
Lel~els 603
Less Floor Space 603
Qrrality Inipro\.ements 604
Mor-e-Acclrrate,Less-Precise Estinzates 604
The Dlficlrlt-to-Quant Benejts 604
Investing in Organizational Capabilities 605
E.vternal It~tegt.atiort:Linkin,q Desigti to the Customer 605
Interr~alIntegration: Connectit~gFrrt~ctionsWithin the
0r;qani:cition 606
Fle.~ihilih:Responsil*enessto Change 606
Cat!niba/i:ation: Achie\-ir~,gRadical Impro\~enient 607
Summary on Building Organizational Capabilities 608 Tlie
Bottom Line 609 Problems 61 1 Cases: Otl~elloCorporation(A):
Capital Eqrripnient P/anning ar~dCor~tro/ 613 WilrningforlTap
and Die 627 Stermon Mills Incorporated 638 B~rr.lington
Northern: Tlze ARES Decision ( A ) 651 Blrt-lingtonNorrl~ern:The
ARES Decision ( B ) 667
INCENTIVE AND COMPENSATION SYSTEMS
673
The Expectancy View of Behavior 673
Intrinsic and Extrinsic Rewards 674
Tying Rewards to Performance 675
Rerttards Based or1 Financial Perforn~ance 675
Ren-ardsBased on Grolrp or Indil-idlral Performat~ce 675
Rew-ards Basecl on Nonfnancial Measltres of Performance 676
E.\-eclrti~teCon~pensation 676
Incenti\-e Conlper~satior~
and the Principal-A,qetrt Relcrtionsl~ip 677
Important Attributes of Compensation Systems 681
Role for Bonrrs and 1ticenti1-eContr.acts 682
Types qf lnce~iti\~es684
Specijic Fotms Asslmiecl by Mor~etclr.yConzperlsation Plans 684
El-aluating Acco~rntirig-BasedIr~cer~ti\!e
Con7pensatior1Scllenies 688
Shot-t-Tern!\*erslrsLong-Term Performar~ceMeasures 692
Ar-e Chief Eseclrtives O~lerpaid? 693
Contents
Rewarding Other Organization Members 695
Gainsl~aring 695
Piecerate Systems 696
Labor-Related Plaris 696
Bonrrs Systerns 697
Summary 697 Problems 699 Cases: McDonald's Coipo~.ation:
Designing an 1ncentil.e System 708 Analog De\,ices. Inc. ( A ) 714
The C11ur.lesRil~ei.Conlpan? 723 RKO Wcri.net. \'idea. Inc.: Inrvnti~*e
Compensation Plan 733 D i ~ c k ~ ~ olnd~rstr.ies,
rtli
1tic.-lnceriti\~e
Compensatior1 Prog~.atns 744
14
FORMAL MODELS IN BUDGETlNG AND INCENTIVE
CONTRACTS 764
Issues and Terms in Formal Incentive Models 764
Wealtll Leisure and Risk Attitlrdes 764
Indi\+idualHonesty and the Role of Contract Moriito~.ing 765
Choosing the Right Marlager and the Role of 1rfor.rnation 766
Balar~cingIncentive and Return Considerations 767
Problems of Obtaining Information for Standards and Budgets 768
Using Irforniation for Re~lardsarid Cont1.01-The Mor.al Hazard
Problem 769
Moral Hazard and lrformation lmpactedriess 769
The Agency Model 770
The Setting 770
Ttie Motivational Problem: Wily a Flat Wage Will Not Do 771
The Principal's Problem: HOM*
to Tie Re~9arclto Pe$ormarice 771
Eliciting Honest Revelation of Privately Held Beliefs 773
The Role of Uncet.tair1ty in the Soviet Incenti~~e
Model 743
Limitations o f the T~.lrtli-lndlrcingBudget Scheme 775
Tt.lrth-IndrrcirrgSchemes for Resolri.ce Allocatio~~
Decisions 777
The Role of Insurance 779
Summary 780 Problems 782
INDEX
793
xiii